The Capitalist Maven

It appears that rumors of the US economy’s demise have been greatly exaggerated. As I predicted earlier, we did not enter a recession in the first quarter of 2008. Here’s a nice gloomy piece courtesy of the AP. Carefully hidden inside this piece is admission of the fact that we are not yet in a recession: “The statistic did not meet what economists consider the classic definition of a recession, which is a retraction of the economy. This means that although the economy is stuck in a rut, it is still managing to grow, even if modestly.”

Elsewhere in the article the reporter tries to continue the media attempts at artificially create a recession by instilling fear. The author states,”A growing number of economists believe the economy is in a recession and is indeed contracting now.” However the author never bothers to explain just who these economists are. The question will be how far will the media go? When next quarter continues to show GDP growth will reporters still try to tell us to fear a recession? We’ll find out July 31, stay tuned…

Jon Economy

I’ve been signed up for MyPoints.com for almost 10 years now. They give you points for reading emails and clicking links. Over the years I’ve collected a few gas gift cards and Hilton Honors points. I actually used the Hilton points reward simply to keep my Hilton account active. It’s a pretty good deal for doing nothing more than clicking on links in emails. You can also earn points for linking through their Shop pages when buying things online. One particularly good merchant is Ebay, as they don’t seem to be partnered with Fatwallet or the credit card cash back sites. It’s nice to be able to get a rebate in the form of points from Ebay purchases.

MyPoints also give you the option to fill out surveys for points but the payout is very low. I usually hope I don’t qualify for the survey which nets a quick 10 points vs. the 50 points I’ll get for filling out a survey that can take 20 minutes. I’d say the value depends on how bored you are… I recommend setting up an email filter on your email account to quickly filter everything from MyPoints to its own folder. Then when you are bored you can quickly go through and click all the links and fill out the surveys.

For surveys, I much prefer MySurvey.com. So far I’ve cashed out $40 from them in just a year of membership. The surveys that are long at MySurvey at least tend to pay $2-$3 per survey. The surveys are sometimes interesting as well. I’ve had several that asked my opinion about new products that being tested. One even offered to send me a free sample of a product and give me additional rewards after I tried it.

These are kinds of things you can do to make money when you are just sitting on the couch watching TV or bored between projects at work. Your hourly rate for participating is probably pretty low but since you aren’t actively doing any work for the money/rewards its nonetheless a good deal.

Jon Deals

A few months back I made a trip to Mohegan Sun Casino in Uncasville, CT. While throwing some dice at the craps table, a woman at the table was asking the dealer how the “Fire Bet” works. He explained that if a shooter hits 4 or more points before crapping out, it pays out. The big payout is if the shooter hits all 6 points which pays out 1000 to 1. “So I bet $1 to win $1000?”, the woman asked. “Yes,” said the dealer “it’s a terrible bet, I’ve only seen it hit once in my time working here.” “But it’s only a dollar”, responded the woman. “Well if that’s how you feel about it”, said the dealer “it’s probably a good bet for you.”

I never would have thought that I’d hear financial advice from a craps dealer. His advise was correct, the “Fire Bet” is a terrible bet, confirmed by the Wizard of Odds. The house edge on the Fire Bet is 25x as much as a bet on the passline. With typical slots payouts you are better off putting your dollar in a slot machine than on the Fire Bet. But if you think “it’s only a dollar” it might not be a bad bet for you as at least you have a chance of getting something back unlike many things you could spend a dollar on.

“It’s only a dollar” can quickly turn into “it’s only five dollars” This tends to happen with things like expensive coffee drinks, popcorn at the movie theater, or ATM fees. As always it’s important to remember how these things can add up over time. A $5 coffee, 5 days a week, 52 weeks a year is $1300. Do you get $1300 worth of enjoyment out of your daily coffee? Could you buy a fancy automated coffee maker that would automatically brew your coffee and load it into a to-go cup every morning by timer for $1300 or less? Yes, you probably could. And every year afterwards that coffee would be yours for nothing more than the price of coffee beans. Could you also just adapt to using a $20 timer coffee pot in the morning and bank the $1280?

Maybe you can’t give up coffee, after all, caffeine is more addictive than nicotine. What about the ATM fees you seem to pay 2-3 times a month? $2 to your bank and $2 to the ATM’s bank: $4 x 3 times a month x 12 = $144. Switching banks is not convenient? Well if your current bank was actually convenient you wouldn’t be paying the fees in the first place… I posted earlier about how I switched to E*Trade Bank and haven’t looked back. I haven’t paid an ATM fee in years, it’s been truly wonderful. E*Trade is not the only place you can find ATM fee reimbursement, there are many others, pick the one that best suits your needs.

Last year I found myself spending $6+ a day on lunch in the cafeteria at my office building. The food wasn’t even good most days. So I started bringing my lunch with me to work. The cafeteria is owned by the building and they have no problem with anyone bringing their own food to accompany their coworkers. So I still get the socialization of eating with coworkers but without the $6 price tag for sub par food. Several of my coworkers have actually been following my lead and bringing their own lunches as well. It’s a huge money saver.

Throwing your money away is never a good idea, no matter the amount.  Having the attitude, “it’s only a dollar” might just mean your throwing your money away. A terrible bet is a terrible bet at any price.

Jon Budget

The only debt I carry on credit cards is 0% arbitrage money that I reinvest at higher rates. For many people however, just getting your high interest cards paid off is a challenge. What follows is some strategies to minimize the interest you pay and help you get them paid off faster.

First of all, you need to determine how you ended up having all that high interest credit card debt in the first place. Did you splurge on a big weekend in Vegas and spend more than you could pay back? Did you go a little crazy redecorating the house? Did you have unexpected medical bills? However, if you have a habit of spending beyond your means, you must get that under control before you can have any hope of getting those bills paid down. Strategies for getting your spending under control is up to you or a topic for another article .

You need to dig out all your latest credit card statements. On your statements, near the end of the bill, will be a summary of finance charges. You need to make note of all the different finance charges on your cards. You will need to concentrate on getting the absolute highest rate paid off first. So if you have $500 to allocate to payments each month, first pay the minimum on all cards, then pay the remainder of the $500 towards the card with the highest rate.

Interest charges accrue continuously(not just in 30 day chunks), so when you have some extra money, use it to pay off your card immediately. Don’t leave it sitting in the checking account waiting for it to be due, go online and make a bill payment immediately. Most credit cards allow you to pay 4 or more times per month using their payment system and if that is not enough, just write out a check and send it in. An added benefit is that it’s paid before you’ve had chance to spend it, without the money burning a hole in your pocket…

On to the more advanced strategies. You probably receive offers in the mail all the time from both your existing cards and new credit cards offering low rate balance transfers. If you don’t, just ignore this section. These offers can vary greatly in their value. For example I posted earlier about a 0%, no fee offer I received from my Citi Diamond Preferred card. This is an example of the best possible offer you will receive. Suppose you have an existing balance at 12% and you receive an offer for 4.99% for the life of the balance, this is obviously a very good deal for you as you’ll be saving 7% in interest charges. Be sure to read the fine print as there are typically fees associated with the balance transfer. These fees are usually 3% with a $5-$10 minimum, often with no maximum. When there is a fee involved you need to determine how long you think it will take you to pay it off. If you plan to have the balance paid off in 6 months, a 3% fee equates to 6% APR so it’s unlikely you’ll benefit. But if its going to take you 2 years to pay off the debt, a 3% one time fee is a small price to pay.

So here’s the quick summary:

1. Pay highest rate card first.

2. Pay the bills as soon as you have the money.

3. Take advantage of offers to lower your effective interest rate.

If you have any questions or comments feel free to post and I’ll try to respond.

Jon Credit cards Credit cards, debt, high interest, paid off

I’ve been investing in ETFs for quite a number of years now.  My first purchase was the S&P 500 spider (SPY), which I bought back in 2002.  I’m up 46% purely in capital gains in 6 years on this one and it has been one of my best investments.  Add in the dividends payed over time and I’m easily up over 50%,  and that even includes the recent the stock market downtown.  I initially bought this with the intent to time the market, buying and selling during what I felt were the peaks and troughs of the market.  Needless to say I just ended up holding it.

In 2005 I decided I wanted to get in on the boom in energy prices but I wasn’t sure of any one company to pick.  I found the Vanguard Energy Vipers (VDE) which I figured would allow me to take advantage of any big moves in energy.  2 weeks after I bought Katrina hit.  I sold 11 months later for a 30% gain, when I sensed that another big hurricane season was unlikely.  A big hurricane season had already been priced into the energy stocks I believed., so I sold.  I was right initially, after the weak hurricane season VDE did very little until the middle of 2007 when oil started its current run…

Recently I’ve seen alot of potential in mining and minerals but I know little about this sector so I picked up some S&P Mining and Minerals Spider (XME).  It’s done very little since I purchased but we’ll see where it goes.

Exchange traded funds are a great way to pick an industry or sector without worrying about which specific company to invest in.  They have low expense ratios and when you invest large enough amounts even the broker fees are small on a percentage basis.  I happen to know alot of the technology sector so I feel fairly confident picking stocks there, with mining and minerals though, I haven’t a clue.  So I let the S&P index pick a bunch of stocks for me.

I tend to favor Vanguard Vipers because of their known efficient style of investing so I usually check if they offer an ETF in the particular area I am looking for first.   Yahoo! Finance has an entire section dedicated to ETFs where it’s easy to find an ETF that fits whatever category you are looking for.

Jon Investments energy, ETFs, investing, mining, S&P 500

Just got done reading a great post over at MightyBargainHunter. It happens to be a rant but raises some excellent points:

” I guess a whole lot of incremental changes add up to a big change, but even the biggest change is too little too late now. The best thing to do is prepare. Prepare for $10 gas, then prepare for $20 gas”

I posted yesterday that I used a combination of bicycling and commuter rail service to get to work yesterday, saving 32 miles of driving and 1.28 gallons of gasoline on the roundtrip. I took the same trip again today, and as long as the weather cooperates I’ll continue to bike to work. I’m not particularly earth conscious and certainly not a tree hugger but it’s not hard to see the benefits of using this method to get to work: health and piece of mind.

A more telling point is that I’ve made the decision to do this despite the fact that I’m still not at the breakeven point when compared solely to the cost of fuel: $4.48 gas vs. $6 train cost. As it turns out, today waiting at the train station I met another fellow also on a bike who was making nearly the same trip. He said that he had started doing the bike/rail commute a year ago when his car was in the shop for significant service. It worked out so well that he continues to do it during nice weather even while his car is again operational. It’s also worth mentioning that he was an engineer like myself. In fact looking around the train I’d say there were probably even more engineers on board. Is it a coincidence that engineers are the first to recognize the value offered by bike commuting? No, it’s probably not a coincidence as engineers spend their lives looking for creative solutions to problems. Traveling 30 miles using the least possible fuel is just another great problem for an engineer to solve.

If we do hit $10 gas, it’s clear that my creative solution to getting to work will pay off. The question is, will it take $10 gas for the morning reverse commute train to have more than 2-3 dozen people on it?

Jon Economy, Money lessons

In honor of Earth Day I rode my bicycle to work. No it’s not April Fool’s day… It’s actually a coincidence. I would have done it yesterday but it was a “holiday” in metro Boston. Patriot’s Day happens to be a holiday celebrated by government employees and a random few companies that do no business outside of Massachusetts. Our friends at MBTA do observe it so rather than deal with holiday rail schedule I deferred to today. I have been waiting for the weather to be nice enough to bike to the commuter rail station in my town of Woburn, MA and ride it outbound to Lowell, MA where I work. The commuter rail stations are both about 2 miles from my home and destination so a bicycle is a necessity. Today was finally the day.

I’m lucky in that I have a reverse commute. I work further from Boston than I live. This means my commute is classified off-peak, allowing me to bring a bike with me on the train. It costs $3 each way for this particular ride so I’m not convinced I’m saving any money. My car gets 25 MPG on my 16 mile commute, 16 x 2 / 25 = 1.28 gallons of fuel per day. At $3.50 a gallon, 1.28 gallons costs $4.48. Doh. What I have not calculated in is the depreciation value(maintenance/wear and tear) of the 32 miles, if I use $0.10 a mile, this means $3.20 depreciation for a total of $7.68. So if I stretch my calculation far enough it does save some money. If I were to use the IRS deduction rate of $0.45 a mile ($14.40) then I’m definitely ahead of the game. But the reality is, it’s not a huge savings.

Now let’s consider the real benefits. I am biking 4 miles in the morning and 4 miles in the evening. This should improve my health and well-being. I’d say that’s a valuable benefit. The train that I ride would have run regardless of whether I rode it or not. It uses the same fuel whether or not I am on it, the weight of one person+bike is unlikely to modify its fuel consumption by any measurable amount. So effectively I am taking 1.28 gallons of demand for gasoline out of the market every day. This has a benefit to the market that reduced demand should equate to reduced prices. So it provides some benefit to society in general. If a million more people were to take the same initiative, they would all get the health benefit at the same time reducing the demand for fuel significantly.

I’m starting to sound like a tree hugging hippie… Not so fast. I’m not suggesting that we mandate this. I don’t even want to urge anyone to try a bike commute. What I want to see happen is for the price of fuel to go high enough that people start searching for answers on their own. I want to see that people make it a point to try to get to work without a car themselves. There is no satisfaction in being forced to be healthy or fuel efficient, but as a personal goal it’s highly satisfying. People are inherently good, they will find such creative uses of public transportation on their own. This is the capitalist solution to high oil prices.

Jon Economy bicycle, commuter rail, earth day, gas prices

It’s Monday, the weekend is over. Did you go out for drinks anywhere this weekend? Perhaps you didn’t because you couldn’t bring yourself to pay $4 for a beer. I grew up and spent the first few years of my adult life in Pennsylvania. I went to college at Penn State. I lived in North Carolina for 3 months. I’ve traveled to nearly half of the fifty states. Never before have I seen government get so involved in manipulating the free market for beer prices as they do in Massachusetts.

You could say in college I was spoiled. Fraternity and house parties were always free, never a cover or cup charge. Once you were old enough for the bars it’s not like the prices were that much higher than free. The student newspaper has a fine list of specials in downtown State College, for example we see specials like $3 Bud Light pitchers and $1 Miller High Life pitchers. You can bet the bar isn’t making a big profit on these but it gets people in the door where they can spend on things like shots and mixed drinks that aren’t always as cheap. For those still convinced of the horrible inflation, the prices were the same 10 years ago when I was in college.

After I graduated college there was an initial adjustment to somewhat higher prices in the city of Pittsburgh. But I and my friends quickly learned when and where the specials were. I remember nights spent at the Boardwalk and Rock Jungle with tables full of $1 drinks. We always had a great time and seldom had to bring along more than a single $20 bill. Visiting Florida and the southern states shows even more great prices. One would expect South Beach in Miami to carry a premium price, however walking the strip I found several places offering $6 pitchers and 2 for 1 drink specials. In New Orleans you just buy yourself a giant beer for $1 from some guy on the street and take it with you. In the Carolina’s if you haven’t found $1 beers you are probably blind.

Then I moved to Massachusetts and was in a for a rude awakening. I was in the habit of asking the bartender what the special was before I ordered my first drink. I got alot of looks like I was from a different planet. A few bartenders mentioned that they thought it was illegal to have specials?!?!? Eventually a few of my older coworkers mentioned that there used to be happy hours but then they were banned and they weren’t sure why or how or any particular detail. There seem to be few specifics on the law, nobody seems to know for sure how it works. All I know is that this law causes everyone to pay more. Aside from a few particularly dive type places, expect to pay at least $3 for a regular domestic beer and $4 for anything imported or darker in color than Bud. Looking for $1 Coronas on May 5th? Sorry… not in Massachusetts. It seems the copy cat neighbor states in New England all seem to have similar restrictions in place, in New Hampshire it seems bars are allowed to have specials (Live free or die!) but they aren’t allowed to advertise those specials(Can I see your papers please…). Since the point of specials is get people in the door, being unable to advertise them takes away the capitalist incentive for bars to offer them.

So the question is do people drink less because of restrictions like this? If you’ve been to Boston on a Saturday night, you’ll agree that it has not reduced drinking in any way. What it has done is made alot of bar owners rich. They no longer have to compete on price. There are several bars that have figured out how to work around these rules. They offer a certain draft beer for $1 all the time, however the keg always seems to conveniently run empty around 10PM when the special is over. These places are particularly dive and need to compete on price to survive. By and large though few bars try to offer low prices.

Regulating bar prices is one way that government can step into the free market and increase prices for everyone. You might also be familiar with Massachusetts’ highest in the nation insurance rates, which also come about because of its state controlled insurance rates. The examples of government intervention increasing prices just goes on. Take it from this capitalist, government intervention in capitalist markets is a bad thing.

Jon Economy, Money lessons beer, capitalism, government regulation, prices

Over at mymoneyblog, the author has been posting about money lessons learned as a child. This brought to mind the one significant lesson that I was ever taught in school about business, investing, and entrepreneurism. In 4th grade at my school, the lesson planned called for 4th graders to create “companies” to produce candy to sell to the entire school. Little did I know what I was about to learn.

The lesson started with us learning about the stock market and how buying shares of a company works. We printed up business plans describing the candy we would sell, created stock certificates, and set an offering price. Then one day all our companies made our IPO’s. We would bring in our allowances/savings/whatever our parents would give us and buy shares of whatever companies we thought would be most successful. There unfortunately was no stock market for the shares after they were all purchased so you needed to be quick to get in on the best candy companies. The classroom really started to look like the Wall Street trading floor as we rushed to buy the shares.

Here is what I remember about the the candy choices. There were various kinds of chocolate. Some companies centered around just creating chocolate with a specific mold and creating a clever brand name for it. My specific company decided to put Rice Krispies in our chocolate creating a Nestle Crunch type chocolate. There was a company producing rock candies and another producing a Chex Mix style snack. Then there was a company that was producing simple popcorn. How boring I thought?

We used the proceeds from the IPO to purchase our supplies to make the candy. Then another day of the lesson was spent actually making the candy. Needless to say everyone had fun doing this.

Then came the day of the sale. My company’s Nestle Crunch style chocolate did a steady business. At the end of the day I think we managed to sell all of the product we made, with a little help from our own purchases. Looking around the room, it was clear there were winners and losers. What surprised me the most was that the simple popcorn, whose business plan and product I had shunned was first to sell out. Clearly I had misjudged the market.

The next day the lesson called for analyzing the profits. We calculated our profit after all expenses, paid our employees, and then distributed the remaining profits to the shareholders. It’s obvious that selling candy to elementary school students is a great business. Every company turned a profit, I think the lowest performing company still managed to pay 30 cents to buy back the 25 cent shares. My particular company paid out 75 cents. The real shocker to me however was the popcorn company which paid over $2 a share.

It was at this point I realized my mistake. My parents recognized that popcorn was an extremely cheap and healthy food, so I always had access to popcorn anytime I wanted it. Others in the school must not have been so fortunate. Keep in mind that this was the 1980’s before microwave popcorn became commonplace, so making popcorn still involved some effort. Thus there seemed to be an insatiable desire for popcorn amongst my schoolmates. The raw materials for making popcorn are also insanely cheap. $10 of vegetable oil and unpopped popcorn will produce enough to feed a school. Chocolate was much more expensive to produce. A large bag of popcorn was priced similarly to a small bag of candy, however that large bag probably only contained about 1 oz of popcorn and cost about 1/10 as much to produce.

Thus this simple lesson taught me a great deal about capitalism. Just because something is undesirable to you doesn’t mean it’s undesirable to others. There is a great deal of profit to be made by recognizing something that you can produce cheaply and easily that others may be willing to pay a high price for.

Jon Money lessons 4th grade, capitalism, lessons, popcorn

I normally only give my credit card statements a passing glance. All of my transactions are downloaded automatically to Quicken. However in my April statements I was glad I looked. My Citi Dividend card had an offer for 0% balance transfer until 11/2008, with a $75 max fee. Then I checked my Diamond Preferred card, it had an offer for 0% balance transfer until 11/2008 with no fee. While I often get these kind of offers with new credit cards, it’s rare to see them on existing accounts.

One of the nice things about Citi balance transfers is they will just send you a check or you can write out a check yourself using the checks that come with your bill and still be eligible for the balance transfer rate. Be sure to read your particular fine print carefully though as this can and does change.

The best way to use these balance transfer checks is to take the money and put it in a high yield savings account. This is called interest rate arbitrage. You might read in the newspaper about hedge funds doing it as well. The difference is that hedge funds borrow money from much larger sources, such as Japanese banks, at low rates and then invest that money at higher rates. In Japan, banks will lend you money for as low as 1% interest. The hedge funds then reinvest this money at European or US banks paying 3-5% interest and pocket the 2-4% difference. Obvious this practice is not without risk, as currency exchange rates can change rapidly.

Similarly, you can borrow from a credit card at 0% and reinvest at a higher rate. The idea is though, that you want to minimize your risk as when that balance transfer promo period is over, the rate skyrockets. For this reason I recommend sticking with FDIC insured high yield savings accounts. You want to be able to pay back the balance in full the month before your rate skyrockets.

With 0% and no fees, its a given that you will make money. How much depends on your credit line, your high yield savings interest rate, and the length of the promo period. So if the promo period is 1 year, you borrow $10,000, and the interest rate is 3%, you’ll make ~$300 for doing nothing more than making minimum payments every month for a year and paying in full in month 12.

Jon Credit cards 0%, balance transfer, citi, credit card